Amendments to Regulations for the Government Securities Act of 1986

Federal RegisterNov 15, 1994

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SUMMARY: The Department of the Treasury (``Department'' or

``Treasury'') is publishing for comment proposed amendments to the

recordkeeping rules in Part 404 and the reporting rules in Part 405 of

the regulations issued under the Government Securities Act of 1986

(``GSA''). The proposed recordkeeping amendment would require entities

registered with the Securities and Exchange Commission (``SEC'') as

specialized government securities brokers and dealers (``registered

government securities brokers and dealers'') under Section 15C(a)(1)(A)

of the Securities Exchange Act of 1934 (the ``Exchange Act'') (15

U.S.C. 78o-5(a)(1)(A)) to maintain and preserve records concerning the

financial and securities activities of affiliates whose business

activities are reasonably likely to have a material impact on the

financial or operational condition of the registered government

securities brokers and dealers. The proposed reporting amendment would

require registered government securities brokers and dealers to file

with the SEC quarterly summary reports of the information required to

be maintained and preserved by the proposed recordkeeping amendment.

The proposed amendments (``risk assessment rules'') parallel the SEC's

final temporary risk assessment rules applicable to brokers and dealers

that conduct general or municipal securities businesses (``registered

brokers and dealers''). The Department's risk assessment rules are

being proposed pursuant to the authority granted to the Department by

the Market Reform Act of 1990 (the ``Reform Act'') and are intended to

provide regulators with access to information concerning the financial

risk posed to registered government securities brokers and dealers--and

to the securities markets as a whole--as a result of certain financial

and securities activities conducted by affiliates within holding

company structures.

DATES: Comments must be submitted on or before January 17, 1995.

ADDRESSES: Comments should be sent to: Government Securities

Regulations Staff, Bureau of the Public Debt, Department of the

Treasury, 999 E Street N.W., Room 515, Washington, D.C. 20239-0001.

Comments received will be available for public inspection and copying

at the Treasury Department Library, Room 5030, Main Treasury Building,

1500 Pennsylvania Avenue N.W., Washington, D.C. 20220.

FOR FURTHER INFORMATION CONTACT: Kerry Lanham (Government Securities

Specialist) or Lee Grandy (Government Securities Specialist) at 202-

219-3632. (TDD for hearing impaired: 202-219-3988.)

SUPPLEMENTARY INFORMATION:

I. Background

In response to the stock market disruption of October 1987, the

bankruptcy of Drexel Burnham Lambert Group, Inc. (Drexel) in February

1990, and other developments in the securities markets, Congress passed

the Reform Act in September 1990.\1\ The Reform Act authorized the SEC

to halt trading of registered securities\2\ during extremely volatile

conditions (``circuit breakers''), facilitate coordinated clearing

mechanisms, develop regulations for large trader reporting, and

promulgate risk assessment rules for broker-dealer holding company

structures. The Reform Act also contained a ``conforming'' amendment to

Section 15C of the Exchange Act authorizing Treasury to promulgate risk

assessment rules applicable to registered government securities brokers

and dealers;\3\ Treasury's risk assessment authority paralleled SEC

risk assessment authority. The Reform Act authorized Treasury to

require registered government securities brokers and dealers to

maintain and report information on the financial and securities

activities of certain affiliates that had the potential to pose

material amounts of risk to the brokers and dealers. The Reform Act did

not authorize Treasury to require financial institutions that have

filed notice (or are required to file notice) as government securities

brokers and dealers to maintain and report risk assessment information,

although the registered government securities brokers and dealers that

would be required to follow the rules would have to maintain records

and submit reports pertaining to the financial and securities

activities of certain affiliates that are financial institutions.

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\1\Pub. L. 101-432, 104 Stat. 963 (1990).

\2\The SEC has authority to halt trading in securities that are

registered under the Securities Act of 1933. U.S. government and

other ``exempt'' securities are not included in the definition of

registered securities under the federal securities laws.

\3\15 U.S.C. 78o-5(b)(2).

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The Drexel failure demonstrated that financial difficulties or

liquidity problems of parent companies or affiliates of brokers and

dealers could have a material and adverse effect on brokers and dealers

themselves; risk assessment authority was therefore intended to help

regulators monitor such developments. The primary focus of the risk

assessment authority was the financial health of large holding

companies whose potential failures pose risks to the affiliated brokers

and dealers, as well as to the securities markets and the financial

system as a whole. The Department believes that these proposed rules

will enhance the safety of the government securities market and provide

for more effective regulatory oversight.

The legislative history\4\ of the Reform Act indicated that risk

assessment rules would require information concerning several

particular types of potentially risky financial and securities

activities conducted by affiliates of brokers and dealers, including

bridge loans, interest rate swaps, foreign currency transactions, other

derivatives (e.g., forwards and futures), and real estate developments.

Off-balance sheet derivatives such as interest rate swaps and foreign

currency transactions were identified as particularly important

categories for risk assessment rules given their high growth rates and

the limited public information available regarding their magnitude and

use.

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\4\H.R. Rep. No. 101-524 and 101-477, 101st Cong., 2nd Sess.

(1990).

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Today, many of these off-balance sheet transactions are conducted

by holding company affiliates of brokers and dealers. In numerous

instances, the activities of these affiliates are not regulated by

securities or financial institution regulatory agencies. Affiliates

conducting these unregulated activities can attain a degree of leverage

and assume credit risks that brokers and dealers, which are subject to

the capital and customer protection rules of the Department and the

SEC, cannot attain. The business activities of these affiliates could

have significant and adverse effects on the financial health of brokers

and dealers. For example, large losses at the parent company level

might cause the credit rating of the parent to decline, which could

cause liquidity problems at the broker or dealer. Thus, the Reform Act

specifically provided the SEC, which was already responsible for the

examination and enforcement of all brokers and dealers (banks excluded)

under the Exchange Act, with direct access to information concerning

the business activities of brokers' and dealers' affiliates that are

outside of SEC oversight. The Reform Act did not, however, provide the

SEC with any new regulatory authority over the affiliates themselves.

In September 1991, the SEC published for comment proposed temporary

Rules 17h-1T and 17h-2T, which together with proposed Form 17-H, would

establish a risk assessment recordkeeping and reporting system for

registered brokers and dealers.5 In response to the request for

comments, the SEC received 63 letters addressing the proposed temporary

rules. After reviewing the comments it received and making

modifications, the SEC issued in July 1992 final temporary risk

assessment rules.6 Rule 17h-1T7 is a recordkeeping rule

identifying and describing the records that registered brokers and

dealers are required to maintain and preserve. Rule 17h-2T8 sets

forth requirements for registered brokers and dealers to submit

quarterly reports summarizing the information required to be maintained

under Rule 17h-1T. The preamble of the SEC's final temporary rules

stated that the SEC staff would issue for public comment a study

evaluating the effectiveness of the SEC's risk assessment rules within

90 days after the rules have been fully operative for two years. At

that time, the SEC will consider what, if any, modifications to its

rules would be appropriate. Treasury will be interested in the SEC's

findings to the extent that such findings are germane to Treasury risk

assessment rules.

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\5\Securities Exchange Act Release No. 29635 (August 30, 1991),

56 FR 44014 (September 6, 1991).

\6\Securities Exchange Act Release No. 30929 (July 16, 1992), 57

FR 32159 (July 21, 1992).

\7\ 17 CFR 240.17h-1T.

\8\ 17 CFR 240.17h-2T.

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Treasury's ability to issue proposed risk assessment rules was

precluded by the expiration of its rulemaking authority under the GSA

on October 1, 1991. Treasury's authority was not renewed until December

17, 1993 (107 Stat. 2344, Pub. L. 103-202).

The Reform Act's conforming amendment, under which Treasury was

authorized to promulgate risk assessment rules, specifically mandated

that, with respect to ``associated persons''9 of registered

government securities brokers and dealers that are also associated

persons of registered brokers and dealers subject to SEC rules,

Treasury rules should conform to the greatest extent practicable to the

rules established by the SEC. In view of this mandate and the

Department's understanding that many registered government securities

brokers and dealers have holding company structures similar to those of

many registered brokers and dealers, the Department has determined that

the SEC's rules should serve as a foundation for Treasury risk

assessment rules, and Treasury risk assessment rules should be

companion rules to the SEC rules.

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\9\ The term ``affiliate'' is not used in the Reform Act,

although it is used extensively in the legislative history. The term

used in the Reform Act is ``associated persons,'' the definition of

which is based on Section 3(a)(18) of the Exchange Act (15 U.S.C.

78c(a)(18)), except that natural persons are not included for

purposes of the risk assessment provisions.

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The Commodity Futures Trading Commission (``CFTC'') was also

authorized to promulgate risk assessment rules pursuant to the Futures

Trading Practices Act of 1992.10 The CFTC published its proposed

risk assessment rules in March 1994.11 As proposed, the rules

would require that registered futures commission merchants (``FCMs'')

maintain information and submit reports regarding the activities of

affiliates whose activities are reasonably likely to have a material

impact on the financial or operational condition of the FCMs.

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\1\0 Pub. L. 102-546, 106 Stat. 3590 (1992).

\1\1 59 FR 9689 (March 1, 1994).

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II. Analysis

A. Reporting and Recordkeeping Requirements

The Department's proposed risk assessment rules incorporate the

SEC's final temporary risk assessment Rules 17h-1T and 17h-2T, with

minor modifications that reflect both the specialized activities of

registered government securities brokers and dealers and the

Department's analysis of the SEC's interpretive letter to the

Securities Industry Association (``SIA'') in September 1993.12

Under the Department's proposed amendments, two general categories of

records would be required: (1) Information concerning the holding

company organization, risk management policies, and material legal

proceedings; and (2) financial and securities information pertinent to

assessing risk in the holding company system (e.g., consolidating and

consolidated financial statements and positions in various financial

instruments). The information required to be maintained and preserved

pursuant to the proposed recordkeeping amendment would be subject to

routine inspection by the SEC. Under the proposed reporting amendment,

registered government securities brokers and dealers would be required

to file with the SEC quarterly summaries of the information required to

be maintained under the proposed recordkeeping amendment. These

quarterly summaries would be required to be filed on the SEC's Form 17-

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\1\2 See letter from Michael Macchiaroli, Associate Director,

Division of Market Regulation, Securities and Exchange Commission to

Douglas G. Preston, Esq., Securities Industry Association (September

20, 1993). [1993 Transfer Binder] Fed. Sec. L. Rep. (CCH) 76,696.

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The information required to be maintained and reported by the firms

pertains only to the firms' ``Material Associated Persons'' (``MAPs'').

The Reform Act did not define MAPs. However, the legislative history

accompanying the statute specified a number of factors that should be

considered when determining which affiliates (associated persons) might

have a ``material'' impact on the financial or operational condition of

brokers and dealers. These factors have been incorporated into

Sec. 17h-1T(a)(2), thereby providing guidelines for determining which

affiliates of the brokers and dealers are MAPs. The initial designation

of MAPs would be made by registered government securities brokers and

dealers.

The term ``associated persons,'' as explained in the legislative

history, is based on the definition at 3(a)(18) of the Exchange Act (15

U.S.C. 78c(a)(18)), except that natural persons are excluded for the

purposes of the risk assessment rules (which automatically excludes

natural persons from the definition of MAPs). Consistent with the SEC

approach,13 partnerships would not be treated as natural persons

and, depending on the circumstances, could be deemed to be MAPs of the

registered government securities broker or dealer. Subchapter S

corporations could be treated as natural persons for purposes of the

proposed amendments if the Subchapter S corporation is owned by one

natural person.

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\1\3See supra note 12.

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Note that, with respect to the Department's proposed risk

assessment rules, the definition of ``associated persons'' differs from

the definition of that term as specified in Sec. 400.3 of the GSA

regulations. The term as used in Sec. 400.3 specifically applies to

certain natural persons who are associated with government securities

brokers or dealers. The following general categories of information

would be required to be maintained and reported.

1. Organization, Risk Management Procedures, and Material Legal

Proceedings

Paragraphs (a)(1)(i) through (a)(1)(iii) of SEC Rule 17h-1T, as

made applicable by the Department's proposed recordkeeping amendment,

would require registered government securities brokers and dealers to

maintain an organizational chart of the holding company structure,

written risk management policies and procedures, and information on

material legal proceedings. The organizational chart would show the

registered government securities broker or dealer and all of its

associated persons, including a designation of which associated persons

are MAPs. Although it would be preferable that this information be

maintained in a chart format, a registered government securities broker

or dealer would be able to maintain and report a description of the

organizational structure that sets forth the relationships among the

registered government securities broker or dealer and its associated

persons, including an indication of which associated persons are deemed

to be MAPs. This information would be included in the first filing of

Form 17-H by the registered government securities broker or dealer and

each year-end filing. Quarterly updates would be required only when a

material change in organizational structure has occurred.

Registered government securities brokers and dealers would also be

required to keep a record of any existing written policies, procedures

or systems concerning their: Methods for monitoring the financial and

operational risks to them as a result of activities of their associated

persons, financing and capital adequacy, and trading positions and

risks. A registered government securities broker or dealer is not

required to create such policies or procedures if none exist. Thus, the

firm would be required to submit with Form 17-H either copies of the

policies (if the firm operates under written policies), a written

summary of such policies (if the firm operates under informal or oral

policies), or a written statement explaining the absence of such

policies. This information would be filed only with the firm's first

filing of Form 17-H. Quarterly updates would be required when

significant changes occur.

Further, registered government securities brokers and dealers would

be required to keep records of all pending legal or arbitration

proceedings to which the registered government securities broker or

dealer or a MAP is a party, or to which any of its property is subject,

as would be required to be disclosed by all firms under generally

accepted accounting principles (``GAAP'').14 The information would

be maintained and reported on a consolidated basis. The consolidation

would be through the highest level holding company that is a MAP--in

most cases the ultimate parent company. The information would be

reported with the firm's first filing of Form 17-H. Quarterly updates

would be filed when material changes occur.

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\1\4Based on contingencies disclosure requirements in Statement

of Financial Accounting Standards No. 5 of the Financial Accounting

Standards Board.

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2. Financial and Securities Information

Paragraphs (a)(1)(iv) and (a)(1)(v) of SEC Rule 17h-1T, as modified

by the Department's proposed recordkeeping amendment, would require

registered government securities brokers and dealers to maintain and

preserve quarterly consolidated and consolidating balance sheets and

income statements, and quarterly consolidated cash flow statements for

the registered government securities broker or dealer and the highest

level holding company that is a MAP. The financial statements would

have to be prepared in accordance with GAAP and would require the

inclusion of notes to the financial statements (although notes would

not have to be provided for the consolidating statements). The

financial statements could be unaudited (unless the firm already

produces audited statements for other purposes). In instances where the

registered government securities broker or dealer would maintain and

file reports that a foreign affiliate files with certain foreign

regulators (see later section on MAPs that are subject to the

supervision of a foreign financial regulatory authority), a short

narrative explaining the material differences between GAAP and foreign

accounting or reporting conventions would be required. A quantitative

reconciliation would not be required.

In order to maintain consistency between the Department's and the

SEC's rules, registered government securities brokers and dealers would

have the option to maintain and report the consolidating income

statements required by paragraph (a)(1)(v) of SEC Rule 17h-1T (as

modified by the Department's proposed recordkeeping amendment) and Part

I, Item 4 of Form 17-H, respectively, on a cumulative year-to-date

basis rather than on a quarterly basis.15 In preparing the

consolidating balance sheets and income statements for recordkeeping

and reporting purposes, registered government securities brokers and

dealers would be required to provide separate entries for each MAP.

Registered government securities brokers and dealers would be permitted

to combine non-MAP affiliates' information in a single category in the

consolidating statements.

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\1\5To reduce the burden on the industry, the staff of the SEC

provided registered brokers and dealers with this option in its

letter to the SIA. See supra note 12.

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Paragraph (a)(1)(vi) of SEC Rule 17h-1T, as modified by the

Department's proposed recordkeeping amendment, and Part II, Section I

of Form 17-H would require registered government securities brokers and

dealers to maintain and report aggregate, gross long and short

securities and commodities positions held by each MAP at quarter-end

(and month-end if greater than quarter-end). Registered government

securities brokers and dealers would also be required to provide a

separate listing of each single unhedged16 securities or

commodities position, other than U.S. Treasury securities, held by each

MAP that exceeds the ``Materiality Threshold'' at any month-end.

Materiality Threshold is defined in Sec. 17h-1T(a)(4), as modified by

the Department's proposed recordkeeping amendment (which largely

differentiates between the Department's and the SEC's capital standards

terminology).

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\1\6In its letter to the SIA (see supra note 12), the staff of

the SEC stated that the determination of whether a position is

unhedged should be made by the broker or dealer and that the broker

or dealer should consider only existing positions. The Department

would adopt the same policy.

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Paragraph (a)(1)(vii) of SEC Rule 17h-1T, as made applicable by the

Department's proposed recordkeeping amendment, and Part II, Section II

of Form 17-H would require registered government securities brokers and

dealers to maintain and report data on certain financial instruments

with off-balance sheet risk and concentrations of credit risk. The

Department believes that capturing such information, including data on

derivative instruments that are not currently subject to regulation,

would enable regulators to better understand the use, scope, and

potential risk of these instruments. Part II, Section II of Form 17-H

provides specific line items for the information and would be reported

quarterly by the firms. The line items include gross long and short

positions in when-issued securities, written stock options, futures,

forwards, interest rate swaps, other swaps, foreign exchange,

commodities, loan commitments, commercial letters of credit, assets

sold with recourse, and a summary of delta or similar analysis if

available.

Part II, Section II of the SEC's Form 17-H was developed based on

the SEC's review of financial instruments with ``off-balance sheet

risk'' and ``concentrations of credit risk,'' as those terms are used

in Statement of Financial Accounting Standards No. 105 (``SFAS 105'')

of the Financial Accounting Standards Board. The SEC noted in the

preamble to its final temporary rules17 that it received several

comment letters regarding the disclosure of SFAS 105-type information

on a quarterly basis (SFAS 105 requires only annual disclosure). In its

preamble, the SEC stated that it ``recognizes that certain additional

burdens will be created by the imposition of quarterly SFAS 105

disclosure; however, the market for these types of instruments is

growing, and much of this activity is being booked outside of the

registered broker-dealer.'' The Department endorses the SEC's view that

such data, though lengthy and somewhat burdensome, is essential to

carrying out the risk assessment provisions of the Reform Act. Further,

as discussed below in the ``Scope of Proposed Risk Assessment Rules''

section, exemptions and special provisions will obviate quarterly

submissions of Form 17-H for most registered government securities

brokers and dealers.

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\1\7See supra note 6, p. 32166.

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Paragraphs (a)(1) (viii) through (x) of SEC Rule 17h-1T, as made

applicable by the Department's proposed recordkeeping amendment, and

Part II, Sections III through V of Form 17-H would require registered

government securities brokers and dealers to maintain and report data

on bridge loans and other material unsecured extensions of credit by

each MAP, funding sources for the registered government securities

broker or dealer and each MAP, and real estate activities conducted by

each MAP. The information would be filed quarterly based on quarter-end

results, or based on month-end results if greater than quarter-end

results for all activities except real estate.

Part II of Form 17-H requires a separate column or separate form

for positions held by each MAP. In cases where a registered government

securities broker or dealer has a non-MAP affiliate which, in turn, has

subsidiaries that are MAPs, the registered government securities broker

or dealer may maintain and report the securities and commodities

position information on a consolidated basis through the non-MAP

affiliate.

B. Exemptions and Special Provisions

The Department proposes to incorporate, with modifications and

supplements, the SEC's exemptive provisions (17 CFR 240.17h-1T(d) and

240.17h-2T(b)). The proposed provisions would exempt registered

government securities brokers and dealers from all of Treasury's risk

assessment rules if they: (1) Do not carry customer accounts and

maintain capital of less than $20 million, (2) maintain capital of less

than $250,000 (regardless of whether they carry customer accounts or

not), or (3) have an affiliated registered broker or dealer, provided

that the registered broker or dealer is subject to, and in compliance

with, the SEC's risk assessment rules, and provided that all of the

MAPs of the registered government securities broker or dealer are also

MAPs of the registered broker or dealer. A registered government

securities broker or dealer that has no affiliates or holding company

would not be subject to the Department's risk assessment rules. The

Department also proposes to allow affiliated registered government

securities brokers and dealers to request in writing that the

Department permit one of the firms (a ``Reporting Registered Government

Securities Broker or Dealer'') to maintain and report risk assessment

information on behalf of the other firms.

The Department also proposes to adopt the SEC's special provisions

for affiliates that are already subject to supervision by certain U.S.

or foreign financial regulatory authorities. (See paragraphs (b) and

2T, as modified by Secs. 404.2(b) and 405.5. With respect to such

affiliates, registered government securities brokers and dealers would

be deemed in compliance with the financial and securities recordkeeping

requirements of the rule by maintaining copies of reports that such

affiliates already submit to certain domestic and foreign regulators.

The registered government securities brokers and dealers would,

however, remain responsible for maintaining organizational charts, risk

management policies, and records of legal proceedings in which they are

involved, and would have to submit such information on Form 17-H (Items

1-3 of Part I of the form).

The Department believes that these types of special provisions and

exemptions would preclude duplicative and unnecessary recordkeeping and

reporting for various registered government securities brokers and

dealers without compromising regulators' need to capture information on

the potentially risky activities of entire holding company systems.

C. Scope of Proposed Risk Assessment Rules

In proposing its risk assessment rules, the SEC noted that the

rules would provide it with greater advance warning of situations, such

as the Drexel failure, which could have a significant impact on the

functioning of the markets and investors in general.18 The SEC

also noted that it believed the majority of registered brokers and

dealers that conduct a business with the public do not pose the types

of risks the Reform Act was designed to address. Following this

precept, the SEC exempted from its rules registered brokers and dealers

whose activities are not likely to pose a material threat to the

investing public or the marketplace (e.g., limited purpose mutual fund

brokers), whose operations are relatively small (as measured by capital

levels), and whose functions do not include carrying customer accounts

(unless they are large firms).

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\1\8 See supra note 5, pp. 44015-44016.

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The SEC also adopted special provisions for registered brokers and

dealers that have certain regulated affiliates, such as banks,

insurance companies, futures commission merchants, and foreign

affiliates, recognizing the existence of certain regulatory reporting

by these entities and eliminating the need to create a new set of

records for such entities. In lieu of adhering to the bulk of the SEC's

risk assessment rules, registered brokers and dealers are, in certain

specified cases, able to maintain and submit copies of reports that

these affiliates already routinely submit to U.S. and foreign

regulators.

Of the approximately 5,600 registered brokers and dealers that

conduct a public business, SEC staff informs us that roughly 250 firms

are currently following the SEC's risk assessment rules. These are the

largest firms and the ones that potentially pose the most risk to the

markets. In contrast, of the 37 registered government securities firms

in existence at the time of this writing, approximately 12 would be

potentially subject to the Department's risk assessment rules. The

Department estimates that 25 of the 37 firms would qualify for at least

one of the proposed Treasury exemptions. It appears that six registered

government securities brokers and dealers would qualify for an

exemption because their capital levels are under $250,000. Seventeen

firms would qualify for an exemption because they do not carry customer

accounts and have capital of less than $20 million. Six firms would

potentially qualify for an exemption because their affiliated

registered brokers and dealers follow the SEC's risk assessment rules.

Of the 12 firms potentially subject to the Department's rules,

three are affiliated within the same holding company structure. Thus,

any one of the firms would be able to request that the Department

authorize it to be a Reporting Registered Government Securities Broker

or Dealer on behalf of the other two firms. Of the remaining nine firms

that would be potentially subject to the Department's rules, three have

foreign bank holding companies, which could ease their recordkeeping

and reporting requirements considerably. These firms would be able to

maintain and submit the same reports that their holding companies

submit to foreign financial regulatory authorities, with a copy

translated into English. The amount of information the remaining six

firms would be required to maintain and report would be based on the

number of MAPs designated and the types of activities the MAPs conduct.

The Department believes this approach meets the objectives of the

statute without imposing significant costs or burdens on market

participants. In order to provide affected firms time to make personnel

and systems adjustments required for compliance, the Department

proposes a three-month phase-in period.

In preparing the proposed rules, the Department consulted with the

staffs of the SEC and the bank regulatory agencies; they concur with

the Department's approach.

The Department also proposes to promulgate technical amendments to

Sec. 404.2 by redesignating paragraphs (b) and (c) as paragraphs (c)

and (d), respectively, and by revising newly redesignated paragraph

(c). The revisions to paragraph (c) would more accurately define the

terms ``registered government securities broker or dealer'' and ``the

Secretary of the Treasury'' as they are used to modify 17 CFR 240.17a-

III. Special Analysis

Based on the very limited impact of the proposed amendments, it is

the Department's view that the proposed regulations are not a

``significant regulatory action'' for the purposes of Executive Order

12866.

In addition, pursuant to the Regulatory Flexibility Act (5 U.S.C.

Sec. 601, et seq.), it is hereby certified that the proposed

regulations, if adopted, will not have a significant economic impact on

a substantial number of small entities. As of March 31, 1994, there

were 37 registered government securities brokers and dealers, of which

only 13 firms would be considered small entities. Treasury estimates

that all 13 of the small firms will qualify for at least one of the

recordkeeping and reporting exemptions in the proposed rules.

Accordingly, the inapplicability of the proposed regulations to small

firms indicates that there is not a significant impact. As a result, a

regulatory flexibility analysis is not required.

The Paperwork Reduction Act (44 U.S.C. Sec. 3504(h)) requires that

collections of information prescribed in proposed rules be submitted to

the Office of Management and Budget for review and approval. In

accordance with this requirement, the Department has submitted the

collection of information contained in this notice of proposed

rulemaking for review. Comments on the collection of information should

be directed to the Office of Information and Regulatory Affairs, Office

of Management and Budget, Attention: Desk Officer for Department of the

Treasury, Washington, D.C. 20503; and to the Government Securities

Regulations Staff, Bureau of the Public Debt, at the address specified

at the beginning of this document.

The collections of information in this proposed regulation are

contained in proposed Secs. 404.2(b) and 405.5. The proposed

recordkeeping requirements in Sec. 404.2(b) would require registered

government securities brokers and dealers to maintain and preserve

records concerning the financial and securities activities of

affiliates whose business activities are reasonably likely to have a

material impact on the financial or operational condition of the

registered government securities brokers or dealers. The proposed

reporting requirements in Sec. 405.5 would require registered

government securities brokers and dealers to file with the SEC

quarterly summary reports of the information required to be maintained

and preserved by the proposed recordkeeping requirements. The

collection of information is intended to allow the SEC access to

certain information concerning the financial risk posed to registered

government securities brokers and dealers. The rule applies only to

registered government securities brokers and dealers. The Department's

estimated reporting and recordkeeping burden hours are based on the

SEC's estimated burden hours for their proposed temporary risk

assessment rules.

Estimated total annual reporting and recordkeeping burden: 288 hours

Estimated average annual burden per respondent and recordkeeper: 24

hours

Estimated number of respondents and recordkeepers: 12

Estimated annual frequency of response: Four

List of Subjects

17 CFR Part 404

Banks, banking, Brokers, Government securities, Reporting and

recordkeeping requirements.

17 CFR Part 405

Brokers, Government securities, Reporting and recordkeeping

requirements.

For the reasons set out in the Preamble, it is proposed to amend 17

CFR Parts 404 and 405 as follows:

PART 404--RECORDKEEPING AND PRESERVATION OF RECORDS

1. The authority citation for Part 404 is revised to read as

follows:

Authority: Sec. 101, Pub. L. 99-571, 100 Stat. 3209; Sec. 4(b),

Pub. L. 101-432, 104 Stat. 963; Sec. 102, Sec. 106, Pub. L. 103-202,

107 Stat. 2344 (15 U.S.C. 78o-5(b)(1)(B), (b)(1)(C), (b)(2),

(b)(4)).

2. Section 404.2 is amended by redesignating paragraphs (b) and (c)

as paragraphs (c) and (d), respectively; by revising newly redesignated

paragraph (c); and by adding new paragraph (b) to read as follows:

Sec. 404.2 Records to be made and kept current by registered

government securities brokers and dealers; records of non-resident

registered government securities brokers and dealers.

* * * * *

(b) Every registered government securities broker or dealer shall

comply with the requirements of Sec. 240.17h-1T of this title (SEC Rule

17h-1T), with the following modifications:

(1) For the purposes of this section, references to ``broker or

dealer'' and ``broker or dealer registered with the Commission pursuant

to Section 15 of the Act'' mean registered government securities

brokers or dealers.

(2) For the purposes of this section, references to Secs. 240.17h-

1T and 240.17h-2T of this title mean those sections as modified by

Secs. 404.2(b) and 405.5, respectively.

(3) For the purposes of this section, ``associated person'' has the

meaning set out in Section 3(a)(18) of the Act (15 U.S.C. 78c(a)(18)),

except that natural persons are excluded.

(4) Paragraphs 240.17h-1T(a)(1)(iii) through (vi) of this title are

modified to read as follows:

``(iii) A description of all material pending legal or arbitration

proceedings involving a Material Associated Person or the registered

government securities broker or dealer that are required to be

disclosed, under generally accepted accounting principles on a

consolidated basis, by the highest level holding company that is a

Material Associated Person.

``(iv) Consolidated and consolidating balance sheets, prepared in

accordance with generally accepted accounting principles, which may be

unaudited and which shall include the notes to the financial

statements, as of quarter-end for the registered government securities

broker or dealer and its highest level holding company that is a

Material Associated Person;

``(v) Quarterly consolidated and consolidating income statements

and consolidated cash flow statements, prepared in accordance with

generally accepted accounting principles, which may be unaudited and

which shall include the notes to the financial statements, for the

registered government securities broker or dealer and its highest level

holding company that is a Material Associated Person;

``(vi) The amount as of quarter-end, and at month-end if greater

than quarter-end, of the aggregate long and short securities and

commodities positions held by each Material Associated Person,

including a separate listing of each single unhedged securities or

commodities position, other than U.S. Treasury securities, that exceeds

the Materiality Threshold at any month-end;''

(5) Paragraphs 240.17h-1T(a)(3) and (a)(4) of this title are

modified to read as follows:

``(3) The information, reports and records required by the

provisions of this section shall be maintained and preserved in

accordance with the provisions of Sec. 404.3 of this title and shall be

kept for a period of not less than three years in an easily accessible

place.

``(4) For the purposes of this section and Sec. 405.5 of this

title, the term ``Materiality Threshold'' shall mean the greater of:

``(i) $100 million; or

``(ii) 10 percent of the registered government securities broker's

or dealer's liquid capital based on the most recently filed Form G-405

(or, in the case of futures commission merchants and interdealer

brokers subject to the capital rules in Secs. 402.1(d) and 402.1(e),

respectively, tentative net capital based on the most recently filed

Form X-17A-5) or 10 percent of the Material Associated Person's

tangible net worth, whichever is greater.''

(6) Paragraph 240.17h-1T(b) of this title is modified to read as

follows:

``(b) Special provisions with respect to Material Associated

Persons subject to the supervision of certain domestic regulators. A

registered government securities broker or dealer shall be deemed to be

in compliance with the recordkeeping requirements of paragraph

(a)(1)(iii) through (x) of this section with respect to a Material

Associated Person if:''

* * * * *

(7) Paragraph 240.17h-1T(c) of this title is modified to read as

follows:

``(c) Special provisions with respect to Material Associated

Persons subject to the supervision of a foreign financial regulatory

authority. A registered government securities broker or dealer shall be

deemed to be in compliance with the recordkeeping requirements of

paragraph (a)(1)(iii) through (x) of this section with respect to a

Material Associated Person if such registered government securities

broker or dealer maintains in accordance with the provisions of this

section copies of the reports filed by such Material Associated Person

with a Foreign Financial Regulatory Authority. The registered

government securities broker or dealer shall maintain a copy of the

original report and a copy translated into the English language. For

the purposes of this section, the term Foreign Financial Regulatory

Authority shall have the meaning set forth in section 3(a)(52) of the

Act.''

(8) Paragraph 240.17h-1T(d) of this title is modified to read as

follows:

``(d) Exemptions. (1) The provisions of this section shall not

apply to any registered government securities broker or dealer:

``(i) Which is exempt from the provisions of Sec. 240.15c3-3 of

this title, as made applicable by Sec. 403.4, pursuant to paragraph

(k)(2) of Sec. 240.15c3-3 of this title; or

``(ii) If the registered government securities broker or dealer

does not qualify for an exemption from the provisions of Sec. 240.15c3-

3 of this title, as made applicable by Sec. 403.4, and such registered

government securities broker or dealer does not hold funds or

securities for, or owe money or securities to, customers and does not

carry the accounts of, or for, customers; unless

``(iii) In the case of paragraphs (d)(1) (i) or (ii) of this

section, the registered government securities broker or dealer

maintains capital of at least $20,000,000, including debt subordinated

in accordance with Appendix D of Sec. 240.15c3-1 of this title, as

modified by Appendix D of Sec. 402.2.

``(2) The provisions of this section shall not apply to any

registered government securities broker or dealer which maintains

capital of less than $250,000, including debt subordinated in

accordance with Appendix D of Sec. 240.15c3-1 of this title, as

modified by Appendix D of Sec. 402.2, even if the registered government

securities broker or dealer holds funds or securities for, or owes

money or securities to, customers or carries the accounts of, or for,

customers.

``(3) The provisions of this section shall not apply to any

registered government securities broker or dealer which has an

associated person that is a registered broker or dealer, provided that:

``(i) The registered broker or dealer is subject to, and in

compliance with, the provisions of Sec. 240.17h-1T of this title, and

``(ii) All of the Material Associated Persons of the registered

government securities broker or dealer are Material Associated Persons

of the registered broker or dealer subject to Sec. 240.17h-1T of this

title.

``(4) In calculating capital for the purposes of this paragraph, a

registered government securities broker or dealer shall include with

its equity capital and subordinated debt the equity capital and

subordinated debt of any other registered government securities brokers

or dealers or registered brokers or dealers that are associated persons

of such registered government securities broker or dealer, except that

the equity capital and subordinated debt of registered brokers and

dealers that are exempt from the provisions of Sec. 240.15c3-3 of this

title, pursuant to paragraph (k)(1) of Sec. 240.15c3-3, shall not be

included in the capital computation.

``(5) The Secretary may, upon written application by a Reporting

Registered Government Securities Broker or Dealer, exempt from the

provisions of this section, either unconditionally or on specified

terms and conditions, any registered government securities brokers or

dealers that are associated persons of such Reporting Registered

Government Securities Broker or Dealer. The term ``Reporting Registered

Government Securities Broker or Dealer'' shall mean any registered

government securities broker or dealer that submits such application to

the Secretary on behalf of its associated registered government

securities brokers or dealers.''

(9) Paragraph 240.17h-1T(g) of this title is modified to read as

follows:

``(g) Temporary implementation schedule. Every registered

government securities broker or dealer subject to the requirements of

this section shall maintain and preserve the information required by

paragraphs (a)(1)(i), (ii), and (iii) of this section commencing March

31, 1995. Commencing June 30, 1995, the provisions of this section

shall apply in their entirety.''

(c)(1) Every non-resident government securities broker or dealer

registered or applying for registration pursuant to Section 15C of the

Act shall comply with Sec. 240.17a-7 of this title, provided that:

(i) For the purposes of this section, references to ``broker or

dealer'' and ``broker or dealer registered or applying for registration

pursuant to Section 15 of the Act'' mean registered government

securities brokers or dealers; and

(ii) For the purposes of this section, references to ``any rule or

regulation of the Commission'' and ``any rule or regulation of the

Securities and Exchange Commission'' mean any rule or regulation of the

Secretary.

(2) For the purposes of this section, the term ``non-resident

government securities broker or dealer'' means:

(i) in the case of an individual, one who resides in or has his

principal place of business in any place not subject to the

jurisdiction of the United States;

(ii) in the case of a corporation, one incorporated in or having

its principal place of business in any place not subject to the

jurisdiction of the United States; and

(iii) in the case of a partnership or other unincorporated

organization or association, one having its principal place of business

in any place not subject to the jurisdiction of the United States.

* * * * *

PART 405--REPORTS AND AUDIT

3. The authority citation for Part 405 is revised to read as

follows:

Authority: Sec. 101, Pub. L. 99-571, 100 Stat. 3209; Sec. 4(b),

Pub. L. 101-432, 104 Stat. 963; Sec. 102, Sec. 106, Pub. L. 103-202,

107 Stat. 2344 (15 U.S.C. 78o-5(b)(1)(B), (b)(1)(C), (b)(2),

(b)(4)).

4. Section 405.5 is added to read as follows:

Sec. 405.5 Risk assessment reporting requirements for registered

government securities brokers and dealers.

(a) Every registered government securities broker or dealer shall

comply with the requirements of Sec. 240.17h-2T of this title (SEC Rule

17h-2T), with the following modifications:

(1) For the purposes of this section, references to ``broker or

dealer'' and ``broker or dealer registered with the Commission pursuant

to Section 15 of the Act'' mean registered government securities

brokers or dealers.

(2) For the purposes of this section, references to

Sec. Sec. 240.17h-1T and 240.17h-2T of this title mean those sections

as modified by Sec. Sec. 404.2(b) and 405.5, respectively.

(3) For the purposes of this section, ``associated person'' has the

meaning set out in Section 3(a)(18) of the Act (15 U.S.C. 78c(a)(18)),

except that natural persons are excluded.

(4) Paragraph 240.17h-2T(b) of this title is modified to read as

follows:

``(b) Exemptions. (1) The provisions of this section shall not

apply to any registered government securities broker or dealer:

``(i) Which is exempt from the provisions of Sec. 240.15c3-3 of

this title, as made applicable by Sec. 403.4, pursuant to paragraph

(k)(2) of Sec. 240.15c3-3 of this title; or

``(ii) If the registered government securities broker or dealer

does not qualify for exemption from the provisions of Sec. 240.15c3-3

of this title, as made applicable by Sec. 403.4, and such registered

government securities broker or dealer does not hold funds or

securities for, or owe money or securities to, customers and does not

carry the accounts of, or for, customers; unless

``(iii) In the case of paragraphs (b)(1) (i) or (ii) of this

section, the registered government securities broker or dealer

maintains capital of at least $20,000,000, including debt subordinated

in accordance with Appendix D of Sec. 240.15c3-1 of this title, as

modified by Appendix D of Sec. 402.2.

``(2) The provisions of this section shall not apply to any

registered government securities broker or dealer which maintains

capital of less than $250,000, including debt subordinated in

accordance with Appendix D of Sec. 240.15c3-1 of this title, as

modified by Appendix D of Sec. 402.2, even if the registered government

securities broker or dealer holds funds or securities for, or owes

money or securities to, customers or carries the accounts of, or for,

customers.

``(3) The provisions of this section shall not apply to any

registered government securities broker or dealer which has an

associated person that is a registered broker or dealer, provided that:

``(i) The registered broker or dealer is subject to, and in

compliance with, the provisions of Sec. 240.17h-1T and Sec. 240.17h-2T

of this title, and

``(ii) All of the Material Associated Persons of the registered

government securities broker or dealer are Material Associated Persons

of the registered broker or dealer subject to Sec. 240.17h-1T and

Sec. 240.17h-2T of this title.